No British recession would be complete without a good old-fashioned run on the pound and this week it has duly arrived. The pound tumbled below $1.62 yesterday, for a fall of more than 6 per cent this week. Even in these volatile times, a decline of 20 per cent in three months is quite something.

Mervyn King on Tuesday night kicked the pound when it was down, with his unremittingly gloomy speech about the economy’s long march back to boredom.

He gave warning that Britain was seeing a mild form of the capital flight suffered by emerging-market economies in the 1990s. Unless this was replaced by other forms of external finance the exchange rate would need to fall.

The Bank of England Governor also said the dangers of inflation had shifted decisively downwards raising expectations that further interest rate cuts were on the way.

This was only reinforced yesterday when the minutes from the Bank’s last Monetary Policy Committee meeting showed that members had been unanimous in the decision to cut rates by half a point to 4.5 per cent two weeks ago.

The prospect of lower interest rates makes holding sterling less attractive compared with the dollar. Official US interest rates are much lower at 1.5 per cent, leaving less scope for further reductions.

In Britain, a cut to 4 per cent next month looks quite possible while some economists are predicting it could be down to 2.5 per cent next year. That could drive the pound down to $1.50 by Christmas according to Citigroup economists. Of course, forecasting currencies is a mug’s game and some rivals are predicting the pound will end the year at about $1.80.

Other currencies have fallen sharply against the dollar, notably the euro, as investors have taken fright at the prospects for the eurozone economy and the likelihood of rate cuts from the European Central Bank.

The dollar has benefited from the view that the radical action taken by the US authorities may mean that the American economy is first out of the downturn. It may also have been boosted by switching of funds out of emerging markets, where confidence is collapsing.

Even so, sterling has been singled out for special treatment amid predictions that the downturn in Britain is likely to be more severe than in other leading economies.

This was underlined by yesterday’s news from the high street with Terry Duddy, chief executive of Home Retail, admitting that Argos was going through the toughest trading in its 35-year history.

With a customer base that includes 70 per cent of the population, Argos is a pretty good guide to consumer confidence, which is dire. Sales are running at 8-9 per cent down on last year having fallen off a cliff at the height of the scare over HBOS and the other banks.

The fall in sterling will make imports more expensive which will, in theory, reduce the Bank’s scope to reduce interest rates. But not enough to prevent big cuts. At the same time it should help exporters. With overseas markets slowing rapidly, it is hardly going to be a bonanza. But as the ejection of sterling from the exchange-rate mechanism in 1992 showed, such sharp devaluations can give the economy a shot in the arm.

And if the pound really does hit $1.50 by the end of the year, it should bring one little bit of festive cheer to the likes of Argos. It is safe to assume that this year there will be fewer Brits doing their Christmas shopping in New York.

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